How To Trade Like A Nobel Prize Winning Economist

The Nobel Prize winner in economics doesn’t deal in immaterial theory. He knows the markets intimately.

Behavioral economist Richard Thaler is an adviser at Fuller & Thaler Asset Management, whose $5.8 billion Undiscovered Managers Behavioral Value Fund has far outperformed the SPDR S&P 500 ETF Trust SPY 0.04%  since the start of the bull market.

As CNBC pointed out, the fund’s Class A shares have risen 512 percent since March 2009, while the S&P 500 is up just 277 percent. Since the start of the year, Fuller & Thaler Behavioral Small-Cap Equity Fund (MUTF: FTHSX) has marginally surpassed the S&P 500, 14.7 percent to 13.9 percent.

So what’s the trick?

Part of Thaler’s strategy is to scout out rock-bottom companies due for a turnaround, particularly considering insider confidence.

"One of the signals we use is insider buying, especially if the CFO all of a sudden doubles his holdings, we give that firm a hard look," Thaler told CNBC.

And why not? Who has a better pulse on the company than the people making its decisions, studying competition, tracking industry trends, swimming in its financials?

By Thaler’s method, if insightful insiders are confident enough in their companies’ prospects to bet their savings on it, it may be worth a look. His consideration is seemingly vindicated by market research suggesting a correlation between insider trading and future stock performance.

According to one study, stocks with executive share buying tend to outperform the market by an average 8.9 percent over the next year. Another study tracked a 24 percent rise.

Investors interested in screening insider activity can consult Forms 3, 4, 5 and 14A on the Securities and Exchange Commission's EDGAR database or filter for executive trades on the G&S Quotient database.